Difference between Verification and Valuation
One of the most common procedures of auditing is verification and valuation of assets such as Goodwill, Freehold Property, Leasehold Property, Plant and Machinery, Furniture and Fixtures, and more. In this blog, we have discussed the differences between these two terms and how they are connected to each other.
What is verification?
An auditor is required to offer an opinion on the accuracy and fairness of the financial situation as depicted by the balance sheet and operating performance as expressed by the profit and loss account. To do so, he must verify the assets, which entails establishing a connection between actual facts or information with those presented or stated in books. The valuation, ownership and title, existence and possession, and presence of any charge on the assets are all examined during the verification of assets.
Verification is the process of substantiating assets recorded in the books of account through physical inspection and analysis of legal and official documents, followed by the formation of an expert opinion on the existence, ownership, possession, categorization, and valuation of an entity’s assets.
How valuation is related to verification?
It is not enough for an auditor to check the arithmetic accuracy of the assets listed on the Balance Sheet; he must also conduct inquiries through information and explanation to determine the true state of affairs. And it is not sufficient for the auditor to reconcile the Balance Sheet items with the books of account; he must also be satisfied with the current position of the assets. The auditor wants to be certain that the various things shown on the Balance Sheet are in order in terms of their existence, ownership, and value. Verification plays a great role in meeting all these objectives. It is both an inquiry and a confirmation process. Even if an asset is legitimately acquired, the auditor must nonetheless confirm that, as of the Balance Sheet date, the asset was not sold to another party, it is correctly valued, and it was not pledged or mortgaged outside the business.
As we can see, one of the main elements of verification is valuation. Valuation is the process of determining the correct value of assets on a specific date. It is the act of determining the value of assets and critically examining these values in accordance with generally accepted accounting standards. The auditor should take utmost care to ensure that assets that do not exist are not included in the Balance Sheet and that those that do exist are not over-valued or under-valued. It is the duty of the auditor to determine whether assets shown in the Balance Sheet are properly valued or not (i.e., whether valuation has been done correctly or not).
In valuing assets, an auditor may depend on the company’s directors/managers or on the certificates of other professionals in that regard, provided that he exercises reasonable care and skill before establishing that reliance.
Differences between verification and valuation
For the purpose of making an accurate and fair assessment of the state of affairs and results of operations as shown by the financial statements, both verification and valuation are required. The following are the points where these concepts differ:
The primary focus of the verification of assets is to prove the physical presence of assets. On the other hand, the determination of the actual worth of assets is what asset valuation is all about.
Asset valuation is a necessary component of the verification process. Ascertaining the existence, ownership, possession, correct valuation, and adequate disclosure of an asset are all part of the verification process. While valuation is solely concerned with ascertaining the accuracy and propriety of the value of various assets displayed on the balance sheet.
As a result, verification is a broader term that involves the valuation of assets. But the approach to valuation is more specific. It is an element of the verification process.
The auditor’s goal in performing verification is to satisfy himself about the existence, ownership, possession, and valuation of an asset. The purpose of the valuation of assets conducted by the management, on the other hand, is to value the assets in accordance with generally accepted accounting principles.
The auditor is responsible for verifying the assets and may be held liable for negligence if the assets are not properly verified. Auditors, on the other hand, are not supposed to be valuers. The valuation of assets in the balance sheet is the responsibility of management, and the auditor might depend on a certificate issued by an authorized valuer in this regard.
Who performs it?
Verification is carried out by the auditor himself or by one of his senior assistants. On the other hand, valuation is performed by the company’s managers or experts.
The auditor does not seek external support and does the work of verification of assets on his own. On the other side, the auditor may seek the assistance and opinion of valuers when valuing assets.
Basis of evidence
Physical inspection, as well as documentary evidence, are required for verification. In the case of valuation, there is very little direct evidence available. Therefore, the auditor is reliant on management estimations.
The auditor ensures and guarantees that the assets have been verified. Whereas, the auditor makes no guarantees about the accuracy of valuation of assets.
|Scope||Includes valuation||Is a part of the verification|
|Object||To verify existence, ownership, possession, and valuation||To ensure assets have been valued according to generally accepted accounting principles.|
|Who performs it?||Done by the auditor himself or by his senior assistants||Done by the company’s managers or experts|
|Advice||The auditor does not seek external support||The auditor may seek the assistance of valuers|
|Evidence||Physical inspection as well as documentary evidence||No direct evidence is available|
|Basis||Facts and information||Estimations|
Valuation is an important component of the verification of assets. Although an auditor is not a valuer, he must exercise reasonable care and skill to ensure that the assets have been valued properly in accordance with the principles of accounting as well as the accepted professional practices. This may be done either by the company or by valuation experts.
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